Why did the price of petrol go up in Indonesia but not in Malaysia – The Diplomat

ASEAN win | Economie | Southeast Asia

Despite some superficial similarities, the production and distribution of energy is regulated quite differently in the two countries.

Caltex gas station in Kedah, Malaysia.

Credit: Depositphotos

With high fuel prices causing political and economic headaches all over the world these days, now seems a good time to make a quick explanation of the political economy of gasoline in two adjacent but very different energy markets, Malaysia and Indonesia. Both countries have historically had large reserves of oil and gas, the production and distribution of which are dominated by state-owned companies: Indonesia’s Pertamina and Malaysia’s Petronas. But this is where the similarities end.

Despite receiving billions in subsidies from the government, Pertamina hasn’t made much of a profit lately and the government recently cut subsidies, causing prices to go up at the pump and starting demonstrations across the country. On the other hand, Malaysia’s Petronas has been reliably profitable, generating significant profits for the state, and has kept the price of diesel and gasoline at Rs 95 stable despite fluctuations in global energy markets. Why can’t Pertamina be like Petronas? Is this a simple case of government and corporate mismanagement?

not exactly. Energy markets in Indonesia and Malaysia are fundamentally different, so the objectives of policy makers and their economic agents – such as state-owned energy companies – will also be different. We need to understand these differences if we are to understand these divergent outcomes.

Indonesia was once a major global supplier of oil. There was a time when oil exports were the main source of government revenue, and the health of the country’s economy was closely linked to Pertamina. There was not much domestic demand in the 1970s, so the supply could be made available to Indonesian consumers at a cheap price while the surplus was exported at good profits. Cheap gasoline for Indonesian consumers is a legacy of that era.

Those days are over. In 2021, Pertamina’s domestic sales of oil and gas were $39.3 billion, compared to $8.3 billion in exports. The domestic market is now largely the main market, consuming most of what is produced in Indonesia. This is somewhat of a problem, because Indonesia is producing less than it used to be while consumers are used to the days of abundant and cheap oil.

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According to the Ministry of Energy, Indonesia’s proven oil reserves have fallen from 4 billion barrels in 2011 to 2.25 billion in 2021. Domestic crude production has fallen from 329 million barrels in 2011 to 240 million in 2021. More dependent on imports and therefore more sensitive to fluctuations global energy prices.

Since the Pertamina business is dominated by the domestic market, and domestic consumption pricing is as much about politics as it is about economics, we should not expect Pertamina to seek profits or be run like a normal business. We should expect the primary objective to be to keep Indonesian consumers aloof from significant price increases. Indeed, fuel prices are still lower than they would be if they reflected real market conditions.

On the other hand, Petronas is built differently. For one thing, Malaysia has a much smaller domestic market than Indonesia, accounting for only about 26.5 percent of revenue in 2021. Just like Pertamina in the 1970s, a larger share of what it produces can be sold outside Malaysia at competitive prices rather than being sold to local consumers at low prices.

Petronas also has a more extensive global production and distribution network, which means that it is not oriented towards the domestic market as much as Pertamina. This makes it easier for Petronas to behave like a traditional, profit-maximizing business. During times of high oil prices, it can generate significant profits from upstream production, while keeping the retail cost of gasoline stable for Malaysian consumers. On the flip side, this global exposure also means that Petronas did very poorly in 2020 when the pandemic dried up demand.

Indonesia’s energy production and distribution is regulated quite differently than Malaysia’s, reflecting structural factors such as market size and domestic supply. These factors will naturally translate into distinct pricing strategies and business operations in each of the state-owned oil and gas companies. So when petrol prices are rising in Indonesia while remaining flat in Malaysia even with Petronas reporting good profits, the comparison isn’t quite as straightforward as it might seem.

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